15 year vs. 30 year mortgage

20 Replies

Everyone has a different opinion of course on this...but IMO a 30 year note is always safest. You get in a bind, it doesn’t hurt nearly as bad. There are pros and cons on both sides. It’s up to you to assess the risk involved and weigh everything according to your personal situation and goals.

There are many folks who are comfortable with no leverage or less leverage. I'm comfortable with more. If your rental can make 10% to 20% ROI with a 75% LTV loan, you'll be great!.

Then, if you send in more principle payments, (i.e. the 15 yr loan), that incremental investment is yielding 4% to 5% (ie. the APR of the loan you're saving interest on). Why not instead, buy another rental?

Have you read what BP'ers are doing with BRRRR? (more leverage....approaching 100% financed)....it's a faster way to grow wealth if the risk/reward works for you.

Remember, no-one's stopping you from paying off a 30 year note in just 15 years, or even less.

But guess what'll happen if you suddenly need to slow down your payments on a 15 year note?...

Some people think the biggest advantage of 15 year loans is the term of the loan, 15 years versus 30 years. But I don’t agree because you can pay a 30 year loan off early if you want too. You don’t have to make the minimum payment on a 30 year loan if you want to pay more. 

For a primary residence I would suggest a 15 yr loan. For a rental property I would suggest a 30 year mortgage. Then when profits are good you can make larger payments to pay it off faster than 30 years. When profits are less you then have more flexibility to pay less until your profits improve again.

@Troy Iversen if it’s for a rental then I assume your goal is cash flow. As long as the numbers work out I’m all about the 30 year. I think my strategy will shift as I go, but right now I want to maximize the monthly and free up cash to reinvest.

@Troy Iversen My wife and I recently went through our first home purchase and we debated the same thing. We ended up finding a 30 year mortgage with 10% down and no PMI (I wouldn't have done 10% down with PMI). This allowed us to save half our down payment for student loans, while we keep getting educated for investing in the future.

The 15 year note was tempting for the quicker pay off (dave ramsey thought process) and 30 years gives us more flexibility to decide what we want to do as we begin our family and allows us to pay offs loans or in your case invest earlier.   0.02

30 yr, debt is cheap right now. The chances of it getting cheaper in 15 yrs isn't likely, but if it did you could refi. So long as your investment outperforms your debt and you have the reserves to service your debt let it ride...

Equity will kill any possible cash flow from a income property and turn it into a liability due to the opportunity value of cash.

Equity with a opportunity value of 10% will suck $866 for every 100K directly off the top of your rental income before any other deductions. 

The only income is being generated by the investors cash not the property thus turning the property itself into a liability. Cash buyers, or those wanting to pay off a mortgage, are the most conservative of investors and earn the lowest return on their money. Their cash invested in a income fund would do as well or better without the liability of having the brick and mortar expenses.

Leverage increases cash flow, equity kills cash flow. 

in 2012 I refied into a bunch of 15s because there was interest rate arbitrage at the time.  30 yr rates were 33% higher.  4% vs 3%.

Now 30s are about 4.625%, 15s  about 4.25%, so I'd go with a 30 if I was starting out because the spread isn't that much, but it changes so get a rate quote on both.  

You can always over-pay to shorten the term, but you can't under-pay if you need to @Troy Iversen   New people should go with a 30 unless the rate difference is huge.

15 years is good because you pay more towards principal but your DTI goes higher when you will try to purchase new investment property. 30 years gives you flexibility of buying power but interest rate is higher. All depend on your goals both terms are good as long as your work with your vision of goal.

Missing from the discussion is the 15 year loan's effect on DTI and the speed at which properties can be acquired.

Take a hypothetical $100,000 mortgage for a borrower with $50,000 in annual income. 45% of the borrower's monthly income is $1,875.

At 4.5%, the 30 year payment is $506.69
At 4.5%, the 15 year payment is $764.99 (the 15 year interest rate and payment should be lower in reality, but I'm keeping it the same for illustration).

The 15 year payment is 150% of the 30 year payment, and the additional $258.30 per month, while going towards the loan principal, uses 6% of the allowable 45% DTI.

Also, while cashflowing a 15-year mortgage is possible, it's hard to keep the total monthly expenses, including the mortgage, under 75% of rental income. That's what Fannie wants to see to offset the mortgage when qualifying for a new loan.

If the Interest Rates WERE equal, and you WANTED the 30y option, but could afford the extra 50% repayments per month with the 15y option, if you then CHOSE to make the additional $258.30/m payments (without being required to do so), the loan WOULD be paid out in 15 years! [But at any time, you could opt to not pay that extra!]

And that's even if if you don't make those extra payments as "principal only!"

If you WERE to make those $258.30/m payments as principal-only, you'd knock off an EXTRA two and a half years!

Yes, that's right. Your 30 year note would be paid off in just 12.5 years! [BUT, the fly in the ointment is the Interest Rate].

Seems to me that the last few years, 30 year Notes have not been too different from 15 year Notes regarding Interest Rate, BUT, if that's now changing, then I reckon we SHOULD be paying closer attention to such differences.

Maybe "the longer-term the better" mantra amongst Investors who are close to the bone SHOULD be challenged?...

Last tidbit on this from me-  when a 15 is done, a 30 will still have about 75% to go.  

Yep, for what later becomes a rounding error on your income statement - $258/mo per example - you will still have 75% of your loan balance when us 15 yr folks are done.  

The word 'mortgage' comes from the French word 'muerte', which means 'TIL DEATH'.

Do you want your til death to last 15 years or 30 years?   May change decisions a little bit??  

My 15s from 2012 are now paying down 75% of each payment toward principle, ie a $1732 pmt = $1200 principle pay down.  A 30 would still be scratching the surface at $422/mo, a difference of almost $800/mo.

Mid to later stage investors would be wise to consider the balance sheet difference of a 15 vs always looking for that couple dollars in cash-flow and doubling the length of their til death.   

@Steve Vaughan haha. “Til Death”!! That was great. Ty
I too refi’d my primary, now rental, during the HARP days. I love the 15 because, although the cash flow isn’t as good the fact that over $1100 a month is paying down the principal.

My opinion is if the 15yr payment works in the numbers, do it.. but you definitely have more options in the future with a 30 yr in case your strategy changes.

Good luck!